Salary sacrifice
January 2007
The Employee's Perspective.
You may have heard of "salary sacrifice" and wondered what are the advantages of sacrificing your salary, and for what reasons would you do this?
Let's consider training costs. If your employer is unwilling to pay for a particular employment related training scheme you would be faced with covering the cost out of your income after tax and National Insurance has been deducted. If the training cost was £1,000 you would have to earn in excess of £1,400 to foot the bill!
If your employer was willing, you could sacrifice £1,000 of your annual salary and your employer could pay the bill. In this way you would only be giving up £1,000 of your salary instead of £1,400 or more.
The types of expenditure or benefits that you might consider under this type of arrangement could be:
1. Flexible working arrangements 2. Childcare costs/voucher schemes - but beware the effect on Child Tax Credit. 3. Pension contributions - no tax benefit but National Insurance savings. 4. Off-site car parking.
Depending on the nature of your employment there could be many other possibilities - but remember that this scheme is only efficient if the benefit received is not taxable on the employee.
The Employer's Perspective.
As a salary sacrifice scheme involves a reduction in gross salary costs, there would be an automatic reduction in employers' National Insurance contributions.
Employees will benefit and therefore be appreciative of the new flexibility and cash savings.
The Pitfalls.
- The changes must be incorporated into contracts of employment and be permanent revisions for the relevant pay period.
- If the employee subsequently decides that the benefit (training, etc.) is no longer required and that reinstatement of salary is requested, the entire previous cash benefits may be compromised.
- The sacrifice must be made before the entitlement to the income has arisen (i.e. before it has been earned).
There can be a significant win-win outcome if salary sacrifice schemes are well thought out, and all the tax and National Insurance aspects considered. We would be delighted to talk through the possibility of setting up a scheme for your business; please call for an appointment.
